Illustrate the budget set of a typical worker

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Reference no: EM132201059

Question: There are 8760 hours in a (non-) leap year. Assume that a typical worker earns$20 per hour and has no other source of income. The worker can use his income to purchase a consumption good priced at $1 per unit.

a) Illustrate the budget set of a typical worker.

b) Suppose that the typical worker chooses to work 2000 hours in a year. Illustrate this bundle in your diagram for part (a). In the diagram include a sample indifference curve through this best bundle.

c) Suppose that the wage rises to $22. Illustrate the new budget line in your diagram.

d) What will the impact of the rise in wages be on the typical worker's labor supply? You may assume that both goods are normal.

e) Illustrate the substitution point for the wage rise in your diagram for part (a).

f) The typical male worker has an estimated elasticity of labor supply of .25. Given that the elasticity of labor supply is positive implies what about the substitution and income effects of the wage increase for a typical male?

g) The typical female worker with children has an estimated elasticity of labor supply of -.2. Given that the elasticity of labor supply is negative implies what about the substitution and income effects of the wage increase for a typical female with children?

h) Let H(w) be the labor supply function then wage income is equal to wH(w). For what values of the elasticity of labor would wage income fall when wages rise?

i) If labor elasticity had a value as in part (h) what would that imply about the preferences for the two goods leisure and consumption goods?

Reference no: EM132201059

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